As promised, this is the first in depth look of our January book recommendation All Your Worth by Elizabeth Warren and Amelia Warren Tayagi. We’ll start this series by taking a look at the “Balanced Money Formula.”


Warren and Tayagi’s formula stems from the idea that once your money is in balance, you won’t have to count every penny and stress out about how you’re going to pay your bills, pay off debt, and save for the future. You’ll have a lifetime plan that will help you live comfortably and secure your future.


Budgeting is a very tiresome undertaking, and though it’s important to financial success, too few people make a budget and stick to it. Often it’s because they feel like they don’t make enough to do all the things that they need/want to get done. Or they feel like no matter how much they plan their budget, the numbers never work out quite right and they spend too much and save too little. It’s easy to get caught up in the negative thoughts while dealing with your spending habits, and the “Balance Money Formula” can help to simplify the budgeting process and help you succeed over the long run.


First, as with any budgeting process, you have to figure out your monthly after-tax income. Make sure you find out your after-tax income, not your take home income. If you have seasonal or variable income, average a few months income together, or take your annual income and divide it by 12 to find out your average monthly income.


Next, you need to figure out your “Must-Haves.” “Must-Haves” include all your basic needs: housing costs, food, health care costs, etc. If you need it and it’s something that you would pay for if you lost your income, or if it’s something that you have a contractual obligation to pay for (excluding credit card debt), it’s considered a “Must-Have.”


Next, you need to figure out your “Savings.” This one is slightly more complicated if you carry a credit card balance from month to month. First, add any monthly contributions you make to a retirement account (averaged for a monthly amount if you make annual contributions). If you have a company match to a retirement account, include that as well (free money!). Next, if you save regularly in any other type of account (college savings, etc.), add that amount in. Also, any payment you make towards your debt beyond the minimum amount due also gets included in the “Savings” amount.


Now comes the trickier part. If you carry a balance (over $200) month to month on your credit card, Warren and Tyagi suggest that you find out how much your balance is changing by taking your balance from 12 months ago minus your balance today and divide the difference by 12. For example, if your balance a year ago was $5,000 and today it’s $4,000, your credit card savings would be ($5,000-$4,000)/12 = $83.33 (you are “saving” $83.33 a month on average by paying down debt). Alternatively, if your balance a year ago was $4,000 and now it’s $5,000, your credit card savings would be ($4,000-$5,000)/12 = -$83.33 (you are growing your debt by $83.33 a month on average and taking it away from savings). Add or subtract this credit card number accordingly from your other savings. The total of these categories equals your total “Savings.”


Warren and Tyagi use this credit card method to show that if you are growing your credit card debt, you are just taking away from what you are saving. So if you are saving $100 a month elsewhere, you are really only saving $16.67. Or if you save $50 a month elsewhere, you actually are saving -$33.33 and making your financial situation worse. It’s really a great way to see the impact your credit card debt can have on your future.


“Wants” come last, and they are the easiest to determine. Just subtract your “Must-Haves” and your “Savings” from your after-tax income. Whatever the number comes out to is what you spend on your “Wants.” A key point that Warren and Tyagi make is that if your money is in balance, it really doesn’t matter what you spend your “Want” money on. That’s what it’s for, to be spent however you want to.


After you figure out the dollar amount you spend on average a month in each category, divide each by your after-tax income and multiple by 100. This will tell you what percentage you spend in each category.


Warren and Tyagi’s “Balanced Money Formula” calls for your “Must-Haves” to be 50%, your “Wants” to be $30, and your “Savings” to be 20%. How do your percentages measure up? What category needs the most work? Next week we’ll continue our series and discuss Warren and Tayagi’s ideas about making changes where needed to find balance. Again, All Your Worth includes many worksheets and help with figuring out how your percentages add up.